Seeking Alpha

Nutanix: Good For Another 30%

|
About: Nutanix, Inc. (NTNX), Includes: HPE
by: High Watermark Investments
High Watermark Investments
Deep Value, contrarian, long/short equity
Summary

Nutanix’s latest earnings surprised the markets again.

In addition to lacking any sales planning related issues, the company also outlined the strength in bookings from its partner ecosystem.

In particular, Nutanix’s HPE partnership has seen the fastest ramp-up amongst Nutanix’s partner ecosystem performances.

With the thesis on Nutanix playing out per our expectation, we think the stock is likely to return another 30%+.

The article was also shared with PRO+ Tech subscribers - find out more about PRO+ here.

In addition to celebrating a decade of its existence, Nutanix’s (NASDAQ:NTNX) improving sales execution over the last couple of quarters has given cheer to investors with the stock price nearing the $40 mark. We have been positive on the stock since June when the gloom was at its peak and still maintain another potential 30%+ return from the current levels.

ChartData by YCharts

Strong Earnings

Nutanix’s 1Q 2020 earnings continued to build upon the strength from Q4 2019. Revenue growth was at a sluggish 0.5% (albeit higher than consensus) due to the move towards a subscription-based revenue model. The bigger story, however, was in the growing traction.

Source: Nutanix 1Q 2020 Presentation

Source: Nutanix 1Q 2020 Presentation

The growth in customers becomes even more important when considered in the context of the growing subscription component of Nutanix’s business.

Source: Nutanix 1Q 2020 Presentation

Furthermore, gross margin stability adds another feather in the management’s cap.

Source: Nutanix 1Q 2020 Presentation

Simply put, despite Nutanix asking its customers to transition to a subscription-based model, they are willing to pay top dollar and the market continues to grow for the company with newer customers joining in.

The management also noted remarkable strength in North America, helping them witness growth. What was even more pleasing was the progress Nutanix saw with HPE:

In Q1, more than half of our HPE DX customers were also new logos to Nutanix, validating this new partnership and our software has increased exposure to HPE installed base.

One example of how our new relationship with HPE is ramping faster than any of our past OEM partnerships is a nearly $2 million deal in Q1 with a new customer which is a large EMEA-based insurance company.

Source: 1Q 2020 Nutanix Earnings Call

With Nutanix primarily competing against VMware (VMW) (which has the blessings of Dell), the strength of growth from the HPE partnership pits Nutanix in the competition for the long run.

In June 19, we had noted:

The markets also do not appear to be accounting for the partnership between Hewlett Packard Enterprise (HPE) and Nutanix in the hyperconverged infrastructure (HCI) market. In April 2019, the companies announced a partnership where Nutanix’s software would be bundled and sold along with HPE’s hardware through HPE’s GreenLake. The resultant hybrid cloud as a service will be managed by HPE.

Source: Nutanix: Starting To Look Attractive

Over the last couple of quarters, not only has Nutanix – HPE partnership started to deliver well but also is coinciding remarkably well with Nutanix’s timelines for a move towards an asset lite model.

Another encouraging aspect of Nutanix's performance is the company's growing partner ecosystem:

Doing this with the hyperscalers, Alibaba, in particular in APAC, but also the server platform vendors who are regional players like Lenovo and Insper and NEC and Fujitsu and Hitachi…

...And we’re hopeful that with the recent acquisition of CloudSimple, it will open up new doors for bare metal as a service. And bring GCP on par with what we are doing with AWS and Azure.

Source: 1Q 2020 Nutanix Earnings Call

With the HPE partnership, Nutanix has effectively managed to establish the following:

  1. A more efficient sales engine: Nutanix is an order of magnitude smaller than HPE and Nutanix continues to expand within HPE’s customer base. It is worth noting that HPE reported a weak set of numbers owing to the global macro conditions and despite that, Nutanix’s performance was not bad. With HPE expecting weakness to wane, Nutanix could continue to see incremental gains from new logo growth as well as upselling in Nutanix's growing customer base.
  2. A proof of concept: When Nutanix had reported sales planning and lead generation issues, most commenters had forgotten the value of Nutanix’s underlying technology. The HPE partnership is a proof of concept of what Nutanix can deliver at scale in an on-premise environment, which makes Nutanix as a viable alternative to VMware (which now has partnerships with all the major cloud players) for private cloud deployments. (Nutanix's Xi Leap has been running in partnership with Google Cloud with Nutanix also building out collaborations with Azure and AWS.)

Since Nutanix is much smaller than VMware and is still independent, Nutanix is also likely to attract a premium for becoming a possible takeover target. (We had talked about Nutanix's standalone value and as a potential acquisition target here.)

Conclusion

We continue to like Nutanix as an under-rated investment play in the growing hybrid- and multi-cloud markets market. As the base case, we think the company still has another 30% upside, with the downside risks dwindling as the company’s sales planning focus continues to shift towards leveraging a strong partner (hyperscaler) ecosystem.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.